Business

The JOBS Act: What Investors Need to Know

On Monday, a new law takes effect that could change the face of startup investing.

The Jumpstart Our Jobs Act (a.k.a. the JOBS Act, which has nothing to do with jobs) is a bill that President Obama has called "game-changing" for its ability to help startups grow, hire and raise funding. Perhaps the most valuable (and least understood) part of the law is how it will alter the rules of startup advertising and investing.

Per the bill, the SEC will lift a 80-year ban on general solicitation of accredited investors (accredited refers to anyone with a net worth of $1 million, annual income of $200,000 for the last two years, or $300,000 combined with their spouse). This means startups can advertise everywhere — from billboards to television commercials.

For most, these changes remain a legal gray area filled with more questions than answers. To help shed some much needed light, here are three key tips for entrepreneurs on the do's and don'ts of the new law.

1. Soliciting Funds

Businesses are free to advertise their funding needs as they see fit. This means "anything from highway billboards, newspaper ads, or crowdfunding platforms," explains Judd Hollas, the CEO of EquityNet, a crowdfunding company that has raised more than $200 million analyzing privately-held businesses and estimating valuations, risk and investment return.

Hollas tells Mashable this advertising change will be a shot in the arm for startups. "Thousands of previously inactive accredited investors will expand the available pool of capital for young businesses," he says.

In 2012, Invested.in partnered with Xpert Financial's Adam Draper, the son of mega Silicon Valley VC Timothy Draper. The two launched a startup marketplace turned accelerator called BoostFunder for both eager startups to raise up to $1 million and for investors to browse and pledge investments. The format is Kickstarter meets AngelList.

2. Verifying Investors

Before accepting any money, businesses must verify that all investors are accredited. Previously, only self-accreditation was required, but now potential investors must disclose income, assets and financial statements, as well as fill out Form D with the SEC.

"Business must actually ask for documentation from the investor that supports their accreditation status, based on income, assets, or other qualifications," Hollas says.

But it may not be as easy as asking, warns Alon Goren, the founder and president of Invested.in. Goren thinks the added hassle of filing paperwork and revealing a company's financial details may deter some from taking advantage of the change, which he describes as against the spirit of the JOBS Act.

It's a benefit-loss equation every entrepreneur and business must determine for themselves, but no risk equals no gain. Skittish companies may be those without positive revenue streams and profits. You can find more helpful rules from the SEC here.

3. Vetting Potential Investments

Investing in a company doesn't automatically equate to earning money. Even a seemingly sure return can turn out to be a big loser. Thus, Hollas advises that investors should always perform due diligence on capital-seeking businesses.

A comprehensive due diligence checklist includes combing through a company's articles of incorporation (tax returns, audit reports, legal tax bills, personal property bills), legal documents and board and shareholder meeting minutes. To combat risk, Hollas suggests investing in a diversified portfolio of startups within different industries.

An iteration of the law in which investors can put money into crowdfunded mutual funds is likely a few years away.

Invested.in's Goren also wants a more streamlined process for businesses and investors and more options without stringent rules.

If enough startups speak up, more changes could be enacted. It probably won't take another 80 years for this law to change again, but it's not an overnight process, either.

What do you think about the new bill? What would you do differently if you were the one writing the legislation? Sound off in the comments.

9 Twitter Accounts Every Startup Investor Should Follow

Fred also blogs daily at avc.com, and engages with his followers in the comment section. (Bonus: the comments are sometimes as good as the blog post itself.)

Wilson has an MBA Monday series, which educates both investors and entrepreneurs on all aspects of a startup, from return on investment to cap tables. He posts links on Twitter along with additional educational content.

Angel investor turned VC Chris Sacca doesn’t have a blog, but he does retweet relevant investor information (and occasionally some funny content, as well). He was an early adopter and investor in Twitter a few years ago, and more recently, invested in Turntable.fm. He tweeted often about his use of Turntable. Without Chris’ advice, it would have taken me weeks to learns about the company - a lifetime in the world of startups.

As new companies and technologies emerge, investors like Chris have an opportunity to see great companies before the masses. They can point you to what is currently hot in the market. It is beneficial to have this insight when you are looking to invest.

Dan is a reporter who writes about private equity and venture capital for Fortune. Among his daily Twitter posts, you’ll find pre-marketing links related to private equity. He organizes all the most interesting content for the day into one place, and comments on stories evolving throughout the day.

Mark Suster is an entrepreneur who made the leap to venture capital, but blogs for Both Sides of the Table. His posts are very well-thought out, well-written and go into a lot of detail about topics helpful to new investors. He also engages with his community in the comment sections, which provides a lot of additional insight. Since he doesn’t blog daily, I rely on his Twitter feed to alert me to his posts and any additional links he shares.

Brad Feld is a venture capitalist at Foundry Group. Follow Brad on Twitter for insights into current topics in the venture capital world. He has been blogging for a long time, and has a lot of great content on his website. Also, see his great set of posts on term sheets; they were the basis of his recent book Venture Deals, a must-read for every investor and entrepreneur.

Chris is an angel investor who runs Founder Collective, and also a co-founder of Hunch. Although he doesn’t blog as frequently as a lot of the other investors, his content is reliably valuable. He organizes posts into sections, like Raising money, Startup Sales/Marketing, Operations and other great topics. You can spend hours learning about startups and investing on this blog.

When I first started following Rob, he was with Spark Capital, but has since moved to NextView ventures. He occasionally writes about investing and startups on his blog, and tweets about topics that any investor will find useful. I also like to follow Rob because he tweets about Boston and NY startups, a perspective I might not otherwise be focused on.

Chris Sacca recommended Bryce Roberts, saying that “he writes thoughtfully." I have to agree with Chris. I frequently click on Bryce's recommended links and read his blog to gain insight into the industry.

Jeff Bussgang is another entrepreneur turned VC and a partner at Flybridge Capital. His blog is similar in concept to Mark Suster’s: a VC’s perspective with former entrepreneurial experience.

He only blogs 3-4 times per month, so I rely on Twitter to update me with his new content. Jeff is a frequent Twitter user, and posts a lot of additional thoughts on investing. He also has a useful book called Mastering the VC Game that every investor should pick up.

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